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How Best to Manage New-Style Currency Crises?

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Exchange Rates, Currency Crisis and Monetary Cooperation in Asia

Abstract

The intensity and suddenness of recent currency crises has inspired a “third generation” crisis literature that focuses on: (a) sharp increases in the domestic value of foreign currency debt (so-called “balance sheet effects”) which adversely affect a country’s solvency position and (b) “sudden stops” in capital inflows (including outright reversals) which negatively influence a country’s liquidity position.2 As Dornbusch (2001) notes:

A new-style crisis involves doubt about creditworthiness of the balance sheet of a significant part of the economy … and the exchange rate … (W)hen there is a question about one, the implied capital flight makes it immediately a question about both … (The) central part of the new-style crisis is the focus on balance sheets and capital flight … (T)hey involve a far more dramatic impact on economic activity than mere current account disturbances … both in terms of magnitude of the financial shock as well as disorganization effects stemming from illiquidity or bankruptcy.

This chapter draws on an article originally published in Journal of International Development, 44 (3), 2008, 21–33 (John Wiley & Sons Limited). Reprinted with permission.

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Authors
  1. Ramkishen S. Rajan
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Editors and Affiliations

  1. School of Public Policy, George Mason University, USA

    Ramkishen S. Rajan (Associate Professor) (Associate Professor)

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© 2009 Ramkishen S. Rajan

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Rajan, R.S. (2009). How Best to Manage New-Style Currency Crises?. In: Rajan, R.S. (eds) Exchange Rates, Currency Crisis and Monetary Cooperation in Asia. Palgrave Macmillan, London. https://doi.org/10.1057/9780230234192_7

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